Budget deficit estimate drops to $296 billion

WASHINGTON—A buoyant President Bush seized on newly reduced federal budget projections Tuesday as proof that his tax cuts are working, saying his previous pledge to slash the deficit in half by 2009 is being fulfilled well ahead of schedule.

Democrats pooh-poohed the figures released by the White House budget office and said that the $296 billion projected deficit for the current fiscal year would still be the fourth-highest ever.

"Today is a good day for the American taxpayer," Bush said at a White House briefing attended by Republican lawmakers, Treasury Secretary Henry Paulson, budget director Rob Portman and other political allies.

"Tax relief is working, the economy is growing, revenues are up, the deficit is down," he said.

The Bush administration projected in February that the 2006 deficit would reach $423 billion, a significant jump from the $319 billion level of last year. Budget officials attributed the lower projection of $296 billion to an unexpected surge in tax revenues to the government.

But N. Gregory Mankiw, the former head of Bush's Council of Economic Advisers, authored a Harvard University study last December that said that tax cuts cost the Treasury more money than they stimulate from economic growth.

Mankiw's study said that up to 50 percent of a cut in capital-gains taxes would flow back to the Treasury in new revenues, but 50 percent would be lost.

Similarly, a Congressional Budget Office study in December said that a 10 percent cut in income tax rates would generate 22 percent of the lost revenue over five years and 32 percent over five more years, but that most of the tax cuts' revenue would be lost to the Treasury and thus make deficits worse.

Democratic members of Congress said that the February projection had been deliberately inflated to make the revised figures look good.

"They overstated the deficit on the front end to claim success later in the year," Sen. Kent Conrad of North Dakota, the senior Democrat on the Senate Budget Committee, told reporters at the Capitol.

Rep. John Spratt, a South Carolina Democrat who sits on the House Budget Committee, said Bush inherited a $305 billion budget surplus from President Clinton in 2001.

"What the administration is in effect doing is taking full credit for bringing down the deficit without acknowledging that its policies are responsible for driving up the deficit," Spratt said.

Conrad and Spratt said the administration's deficit projection excludes the full cost of the wars in Iraq and Afghanistan and omits other expenses.

A nonpartisan think tank agreed that the nation's fiscal affairs still aren't on track.

"A $300 billion deficit is still a $300 billion deficit," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, "and that is nothing to break open the champagne over."

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To the extent that Bush accepted responsibility for the deficits created since he took office in January 2001, he blamed them on the U.S. military campaigns in Iraq and Afghanistan, and on broader consequences of the Sept. 11, 2001, attacks.

"Fighting a war on terror and defending the homeland imposes great costs, and those costs have helped create budget deficits," Bush said.

Bush also sought to portray the $296 billion projected deficit as small within the context of the overall American economy.

"This year the deficit will shrink to 2.3 percent of GDP (gross domestic product)," he said. "That's about the same as the average over the past 40 years."

Bush asked Congress to pass legislation giving him a line-item veto, which would allow him and subsequent presidents to pare specific projects from the giant annual appropriations bills instead of having to veto a whole measure.

Congress approved a line-item veto in 1996, but the Supreme Court struck it down two years later, saying the change would require a constitutional amendment.

While Bush claimed to have reduced discretionary spending "not related to the military or homeland security," some conservative Republicans both inside and outside Congress have criticized spending increases on his watch.

Sen. Judd Gregg, a New Hampshire Republican and the chairman of the Senate Budget Committee, said the new projected deficit was encouraging, but he pressed for congressionally mandated deficit caps and other controls to reduce it further.

On a day of fiscal and political tit for tat, the Democrats offered a bad economic statistic for every good figure provided by the White House:

Bush said his tax cuts had sparked a surge in federal revenues; Conrad countered that total revenues are only now reaching their level in 2000 before Bush took office.

Rep. Roy Blunt of Missouri, the No. 3 House Republican, said the new deficit figures prove that "tax cuts grow the economy"; Spratt said the deficit will soar again after 2010 when new permanent tax cuts take effect.

Bush attributed the surge in tax revenues to increased personal income tax payments spurred by a growing economy; Rep. Steny Hoyer of Maryland, the No. 2 House Democrat, pointed instead to rising business income.

"The increase in revenues to the Treasury is largely attributable to record corporate profits, not a roaring economy that is benefiting American taxpayers, who are facing exploding gas prices, skyrocketing health care costs and rising college tuition costs," Hoyer said.